LONDON (Reuters) - Manufacturing activity expanded at its fastest pace in 10 months in March, driven by a pick-up in new orders and increasing the chance that economy grew in the first three months of 2012 and avoided a recession.
Together with signs that a surge in firms’ costs could fuel inflationary pressures, the improvement in the sector is adding to views that the Bank of England may shy away from another cash injection to boost the fledgling recovery.
In another hint that the economy is back on track for growth, financial service firms reported stronger business and plans to hire new staff, a survey from the Confederation of British Industry showed.
The Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI) rose to 52.1 in March from an upwardly revised 51.5 in February, confounding analysts’ forecasts for a drop to 50.7 and hitting the highest level since May 2011.
The index has been above the 50 level that separates expansion from contraction since December.
The survey indicated manufacturing output growth of 0.3 percent in the first quarter of 2012, up from a 0.7 percent decline in the last three months of 2011 which had contributed to an overall contraction of the economy, Markit economist Rob Dobson said.
“This is obviously nowhere near a strong pace, but it is at least sufficient to prevent the sector from remaining a drag on broader GDP growth,” Dobson said. “Inflows of domestic and export orders also showed some improvement in March, but exporters are having to tap markets further afield as conditions in the euro zone remain lethargic,” he added.
Damaging spillover onto the British economy from the euro zone debt crisis has been contained by a trillion euro cash injection into financial firms by the bloc’s central bank. Signs of economic resilience in the United States and Asia have also given hope to British firms.
Economists at Lloyds Bank said their own business survey showed an “unmistakably positive” tone among companies.
And a survey from accountants Deloitte showed that chief financial officers of major companies were much more optimistic than three months ago, though many firms had scaled back plans for investment compared to intentions given last year.
A sharp drop in business investment was the main drag on the economy at the end of 2011, when the escalation of the euro zone crisis lead many firms to put investment plans on ice.
Overall the surveys will reinforce expectations that the Bank will hold off injecting more stimulus into the economy once its 325 billion pound quantitative easing programme is complete in May, especially if an equivalent survey of the services sector, due on Wednesday, also shows a pick-up.
All 63 economists in a Reuters poll expect the Bank to leave rates at a record low 0.5 percent at its monthly policy meeting this week and keep its asset purchase target unchanged.
“There are some headwinds to growth in Q2, partly related to the holiday but also to what’s going on in gas production and the run to buy petrol at the end of March,” said BNP Paribas analyst David Tinsley. “But that all aside, there seems to be some underlying momentum in the economy.”
Sterling rose to a 13-month high versus a trade-weighted basket of currencies in the wake of the manufacturing data.
Data showing that firms raised prices in response to higher raw materials costs are likely to dismay some of the more hawkish MPC members, who are concerned that inflation will not fall as quickly as they had hoped due to a rise in oil prices.
The PMI input prices index was its highest since last August, with manufacturers reporting higher prices for electronic components, metals, oil, plastics and transport.
The pick-up in firms’ cost pressures since the start of this year was one of the steepest in the survey’s 20-year history. Moreover, firms passed on some of the higher costs, driving up the output prices index to a six-month high, Markit said.
The survey also showed that manufacturers ramped up output in response to rising demand from home and abroad.
The new orders index jumped in March to its highest in a year. The increase in export orders reflected new business from Africa, southeast Asia and Japan. That was tempered by some firms reporting a decline in business from Europe.
Manufacturers’ stockpiles rose at the fastest pace in the survey’s history, with the steepest gains booked in consumer goods as some firms were rebuilding inventories and others were hopeful that consumers would spend more this year, Dobson said.
Additional reporting by Olesya Dmitracova, David Milliken and Sarah White; Editing by Toby Chopra